REDD: Cost-Benefit Analysis at the Country Level Daniel L. Martino daniel.martino@carbosur.com.uy Hanoi, Vietnam - 13 November 2009 REDD at the Copenhagen Climate Talks Bridging the gap between Negotiation and Action Only a fraction of the emissions from deforestation and forest degradation can be reduced IPCC AR4 provided estimates of climate change mitigation potentials at different carbon prices, for different practices and in different regions of the world Total emissions from deforestation: 5.7 bn t CO 2 /year
Costs and benefits of REDD activities There may be non-cash or difficult to quantify costs (e.g., food insecurity, social tensions, cancellation of planned infrastructure development, intensification of agriculture, etc.), not considered here Costs and benefits of REDD activities Clearly attractive Clearly not feasible Feasible if non-market value, or a part of it, is recognized and somehow rewards the developers of the REDD activity
Comparability of costs and benefits Costs and benefits occur over time. To be comparable, they must be expressed on a common basis, e.g., as net present value (NPV) NPV gives more weight to costs or benefits occurring close in time to the reference time, using a discount rate. The discount rate may be lower for certain costs (e.g., Phase I costs in REDD) than for revenues because the latter are more uncertain. NPV does not consider any financial problems due to imbalanced cashflows in certain periods. The higher the risk of benefits, the higher the discount rates applied. Effect of discount rate on NPV Minimizing the risks of REDD activities makes a big difference!
Components of REDD benefits Cash value Revenues from carbon payments Wood products (including firewood, even if it is not a cash income) Non-wood forest products Payments for environmental services other than carbon Non-cash value Ecosystem services (watershed regulation, biodiversity, nutrient cycling, soil conservation). Some of these are transboundary River navigation, improved water quality (may also be transboundary) Recreational and cultural values Components of REDD costs REDD readiness Capacity building, education Development of regulations and institutions (legal issues, land tenure, local community rights, ) Data collection (remote sensing data for identification of trends in land use changes, forest carbon stocks, wood removals by harvest, assessment of practices on converted lands,.) Development of baselines (identification of drivers of deforestation, development of models for predicting future deforestation,..) Demonstration activities
Cost of REDD readiness US$ 2.7/tCO 2 US$ 4/tCO 2 Example assuming that an investment of US$ 1 bn/yr is needed during 10 years and that IPCC economic potential is achieved in 2030 (a discount rate of 10% per year was used) Components of REDD costs Design and Implementation of activities Policies and measures (Phase 2), projects or sub-national activities (Phase 3) MRV Transaction costs (including budget for REDD-related institutions) Costs related to eventual requirements for co-benefits Commitment by the REDD country to reduce emissions Costs associated with risk of non-permanence This can take different forms (reduced carbon price, insurance costs, creation of buffer reserve) The higher the risk, the higher the cost
Risk of non permanence Risk of non permanence - REDD
Risk of non permanence - REDD Risk of non permanence - REDD
Components of REDD costs Opportunity costs This is likely to be the main cost component in most cases There is a wide variation of opportunity costs among different regions and different uses of converted lands Source: FAO (2009) Vital Forest Statistics Opportunity costs Components of REDD costs The NPV of the income of the alternative land use depends on the number of years considered. In the long term (if alternative land use is sustainable), NPV becomes constant. REDD benefits only accrue for a limited number of years (i.e., when emissions are avoided).